How CPP Contributions Used to Work
Employees and employers in Canada make Canada Pension Plan (“CPP’) contributions, and as of 2023, there’s a single annual ceiling of contributions of 5.95% for both employees and employers. This ceiling is officially called the “Year’s Maximum Pensionable Earnings“. The Government of Canada sets a new Year’s Maximum Pensionable Earnings rate ceiling every year (see the rate here).
How CPP Contributions Will Work in 2024
Starting in 2024, there’s going to be a second ceiling on CPP contributions. This second earnings ceiling is officially called the Year’s Additional Maximum Pensionable Earnings. The Year’s Additional Maximum Pensionable Earnings ceiling is set to be exactly 14% higher by 2025 than that Year’s Maximum Pensionable Earnings ceiling (and it will likely stay at this rate for many years).
In the result, middle and higher income employee and employer CPP contributions will go up immediately, but so will pension benefits for middle and higher income retirees over time.
How Will The Second Ceiling Work?
Once a worker’s earnings pass the first earnings ceiling (the Year’s Maximum Pensionable Earnings), any earnings above that but below the second earnings ceiling (the Year’s Additional Maximum Pensionable Earnings) are contributed at a rate of of exactly 4% by both employees and employers.
In short, beginning in 2024, employees and employers will contribute 5.95% of earnings top the CPP up to a first ceiling called the Year’s Maximum Pensionable Earnings. For any earnings above the first ceiling but below a new second ceiling called the Year’s Additional Maximum Pensionable Earnings, employees and employers will contribute 4% of earnings to the CPP.
Young Workers Will Get The Most Benefit From The New Ceiling
By 2064, the second CPP ceiling will increase the maximum CPP retirement benefit by about 50 per cent- CPP income replacement levels will go from replacing 25% as of 2023 of a worker’s pensionable earnings to 33% as of 2064. In this way, young workers entering the workforce in 2024 will see the most significant increase in benefits, while older workers near retirement in 2024 will see a very minimal benefit.
Jeff is a lawyer in Toronto who works for a technology startup. Jeff is a frequent lecturer on employment law and is the author of an employment law textbook and various trade journal articles. Jeff is interested in Canadian business, technology and law, and this blog is his platform to share his views and tips in those areas.